HMRC – success on tax avoidance

Posted 17th January 2014

As part of the measures announced by the Government which were to be taken to address the UK’s economic deficit, a key element of the revenue raising process was to tackle tax avoidance. The Government and HMRC have adopted a notably more aggressive approach to litigating against tax avoidance schemes, and there have been a series of high profile tax cases during the previous few years in which tax avoidance schemes have been widely marketed to be held in court as ineffective.

Over the Christmas period details were announced of two more successes for HMRC in the courts, and the cases show that the judiciary have lost none of their appetite to support the Government’s aim of tackling tax avoidance.

Case 1: Eclipse 35

A tax efficient partnership called Eclipse 35, which was invested in by more than 200 high net worth individuals, was confirmed on appeal to be ineffective even though it sought to use an established and legal tax relief aimed at enabling tax efficient funding of film production. The appeal courts confirmed that even though the partnership entered into a transaction which did involve film production, the fact that the partnership sought to use a circular set of transactions to provide tax relief (which substantially outweighed the capital the members of the partnership had put at risk) would be considered as abusive.

Whilst the decision in the Eclipse 35 partnership case only has an immediate impact for the members of the partnership itself, the principles established will be likely to be used by HMRC to challenge other similar tax efficient investment structures.

Case 2: Philip Boyle v HMRC

Philip Boyle v HMRC involved a “contractor loan arrangement” whereby a contractor who HMRC would typically deem to be in receipt of income by way of employment had sought to use an arrangement in which he was instead provided with a loan by an offshore company, which was argued was not employment income.

The contractor sought to argue that the amounts received were not income from employment, but the Tax Tribunal decided that the amounts received were “in substance and reality income”. The contractor also sought to argue that because the amounts of tax owed, if the amounts were employment income, were owed by an offshore company then HMRC could not pursue the amounts from the contractor. The Tax Tribunal decided that anti-avoidance provisions which applied to the transfer of assets abroad could be used to make the amounts loaned subject to income tax in the hands of the contractor.

Both the cases relate to tax avoidance mechanisms which are similar in nature to structures which have been increasingly marketed as mainstream planning over the last few years. In both cases, the decisions act as a warning that tax driven structures which are considered to be “abusive” can be successfully challenged by HMRC, even if they have been carefully considered by the promoter and have received supporting technical analysis.

This is particularly relevant following the implementation of the UK’s General Anti Abuse Rule (“GAAR”) which covers nearly all UK taxes. The existence of the GAAR means that if a tax avoidance mechanism sounds too good to be true and is not within the spirit of Parliament’s intentions when drafting any tax reliefs, there is a significant chance the tax avoidance mechanism may be proved ineffective by HMRC, leading to significant tax and interest costs for the users of the avoidance mechanism.